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Research
GAIL India - PNGRB Slashes DBN Pipeline Tariff; We Cut Rating To Hold - Nirmal Bang
Posted On : 2012-07-21 23:06:19( TIMEZONE : IST )
The regulator, PNGRB (Petroleum & Natural Gas Regulatory Board), has cut gas transmission tariff for Dadri-Bawana-Nangal (DBN) pipeline of GAIL (India) by 57% to Rs11.85/mmBtu. The company had sought a tariff of Rs27.23/mmBtu on the basis of capex of Rs22.02bn to carry 31mmscmd of gas. The reduction in tariff would be beneficial to NFL (National Fertilizers Ltd) and gas-based projects likely to be served in North India.
What led to the difference between PNGRB and GAIL's tariff calculations: The key differences behind the 57% lower tariff of DBN are as follows: 1) Volume transmission considered as per regulations, 2) GAIL submitting capex of additional spur lines which were not a part of the revised tariff filing, 3) Removal of inflation rate up to March 2011 and consideration of actual phasing of capex, 4) GAIL's move to include 345 days as operating days, while the PNGRB considered it as 355 days.
Impact analysis: On the basis of our estimated tariff of Rs19.5/mmBtu, we have valued the DBN pipeline at Rs11/share. Now, with the PNGRB-mandated tariff of Rs11.85/mmBtu, the valuation of the DBN pipeline would decline to Rs4/share (we have assumed utilisation rate of 23%/26%/39% for FY13E/FY14E/FY15E, respectively). The reduction in DBN tariff leads to a decline in our blended tariff assumptions at Rs911/Rs970/Rs1,058 for FY13E/FY14E/FY15E, respectively, compared to Rs925/985/1075 computed earlier. Our EPS estimates have dropped to Rs29.8/Rs31.6/Rs35.2 for FY13E/FY14E/FY15E compared to Rs30.1/Rs31.9/Rs35.6, respectively, earlier.
We have estimated a provision of Rs500mn as the tariff order is valid retrospectively from January 2010, while our estimate of retrospective cut assumes FY11/FY12 volume at 1.0/4.0mmcmd. We see a downside risk to project IRR as the actual volumes would be much lower than the normative volumes assumed in tariff computation. Our calculations indicate that a pre-tax 18% project IRR for the DBN pipeline would fall to 10.6%. With the recent run-up in stock price (20% in the past two months), the stock is approaching our target price of Rs381. Hence, we downgrade the stock to Hold from Buy and cut our target price to Rs374 from Rs381.
